Taylor Capital Group Inc.'s return to the home mortgage business after eight years illustrates that sometimes it's who you know — and what they know.
Last week the Rosemont, Ill., company hired William Newman and two dozen other veterans of what used to be ABN Amro Mortgage Group Inc. to start a home loan unit. The $4.5 billion-asset parent of Cole Taylor Bank said it wants to generate fee income and rely less on commercial and industrial and residential real estate development loans, where delinquencies are mounting.
But according to Mark Hoppe, the president of Cole Taylor Bank, the company wouldn't have picked consumer mortgages as the place to branch out were it not so familiar with the hires. "It is key that it's Willie and this team of people that we've known for some time," Hoppe said. "It would be difficult for us to make this foray otherwise."
The plan is contrarian, and not only because the Mortgage Bankers Association forecasts industrywide originations to drop 40% to 60% next year, to $1.1 trillion-to-$1.5 trillion, as rising interest rates dampen demand for home-purchase and refinancing loans.
Newman's group will be originating loans through mortgage brokers (as well as Cole Taylor branches and retail mortgage offices). Brokered loans have fallen out of favor in recent years because of higher default rates and the perception that they have higher incidences of fraud.
Taylor, Bean & Whitaker Mortgage Corp., once the second-largest wholesale lender, went bankrupt this year.
Brokers' share of loan originations has sunk from a peak of nearly 70% in 2006 and is now closer to 20%, according to David Olson, a managing director at Access Mortgage Research and Consulting Inc. in Columbia, Md.
But Hoppe said the recruits' expertise will help Cole Taylor succeed in a channel where a number of major lenders have thrown in the towel — including Citigroup Inc., which shuttered its wholesale operations in 2008, the year after it bought ABN Amro Mortgage.
"The ABN Amro Mortgage model made substantial use of brokers among other methods of origination," Hoppe said. "While there are legendary stories of bad brokers, there are many very honest, good ones as well."
Some observers say there are opportunities in this niche.
"The variable cost nature of the broker channel is very attractive for a lender, as long as they take control of the downside," said Jonathan Corr, chief strategy officer at mortgage technology vendor Ellie Mae Inc., in Dublin, Calif.
Hoppe and other Cole Taylor colleagues know Newman and his crew from when they all worked under the umbrella of LaSalle Bank Corp. of Chicago.
Newman is the former president of the wholesale arm of ABN Amro Mortgage, which was based in Ann Arbor, Mich. At its height in 2003, the unit was the nation's No. 6 originator.
That same year, the Dutch banking company ABN Amro Holding NV sold the $113 billion-asset LaSalle to Bank of America Corp.
Hoppe had been the CEO of LaSalle Bank Midwest, in Troy, Mich., before he joined Cole Taylor in January 2008.
He drew a parallel between the unit Newman is starting and Cole Taylor's foray last year into asset-based lending.
For that venture, Cole Taylor hired another veteran executive from LaSalle, Michael Sharkey. The asset-based lending business booked $250 million of new loans in its first year with just six salespeople in core markets including Chicago, Houston and Atlanta, Hoppe said.
In both cases, Cole Taylor is "going with recognized leaders in their niche that have a national footprint."
The mortgage unit will originate prime loans beginning in the first quarter that will be sold to Fannie Mae and Freddie Mac.
Cole Taylor has applied to the Department of Housing and Urban Development for approval as a Federal Housing Administration lender, Hoppe said.
Cole Taylor also will originate jumbo loans — those too big to be purchased or guaranteed by Fannie, Freddie or the FHA — but only when it has commitments to purchase them from other investors in the secondary market, Hoppe said.
Cole Taylor plans to sell the servicing rights for the mortgages it originates, rather than service the loans itself, at least for the first year, he said.
Brian Martin, an analyst at FIG Partners, said that since Cole Taylor operates just nine branches, it has been unable to generate a significant amount of fee income compared with its peers.
"It's probably not a risky endeavor, because mortgage bankers are paid on commission based on what they produce, so it's incrementally positive to the bottom line," Martin said.
Larry Charbonneau, a managing director at Charbonneau & Associates Inc., an advisory firm in Spring, Texas, said starting a mortgage unit from scratch can be expensive. Many banks these days are opting to sell their mortgage units to raise capital, he said; conversely, nonbank mortgage lenders are looking to buy a bank to gain deposits as a base to fund loans.
Newman most recently was head of mortgage banking at Equity Services Inc., a small independent lender in Raleigh.
Taylor Capital reported a third-quarter loss of $5.3 million, compared with a loss of $97.2 million a year earlier.
The company took a $15.5 million loan-loss provision in the third quarter, down from a $39.5 million provision in the second quarter.
Cole Taylor quit residential mortgages in 2001 when the bank's previous management team determined it was not a strategic business. In retrospect it was a smart move, since a few years later underwriting standards dramatically loosened, leaving many lenders and servicers stuck today with stockpiles of delinquent mortgages and repossessed homes.
"That bullet was effectively dodged," Hoppe said. "Now it feels pretty strategic to us. We're not going to become a mortgage bank. It will just be a piece of what we are."